FEMA to issue $275m cat bond for NFIP

The Federal Emergency Management Administration (FEMA) will launch a cat bond to transfer risk from the National Flood Insurance Program (NFIP) to the capital markets through Flood Smart Re, a Bermuda-domiciled insurance vehicle.

It would be the first catastrophe bond to transfer risk from the NFIP to the capital markets and it will seek $275 million of reinsurance protection, Artemis reported. The resulting reinsurance will only cover FEMA and the NFIP’s exposure to flood events caused by US named storms, the report added.

Frank Nutter, president of the Reinsurance Association of America (RAA), said, "The RAA has long advocated for the NFIP to utilize the private market to provide financial backing for the government’s flood risk. Along with its second successful placement of reinsurance coverage earlier this year, the cat bond issuance confirms FEMA’s continued commitment to expanding private sector backing and the financial protections it will afford the NFIP and American taxpayers.”

FEMA first purchased reinsurance in 2017 and recovered $1.04 billion from the private markets due to losses from Hurricane Harvey. In early January 2018, FEMA continued its practice of resiliency and protection against future floods by securing $1.46 billion in reinsurance from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event occurring in calendar year 2018.

Adding the new “building block” will enable FEMA to transfer risk through two avenues – the traditional reinsurance markets and the capital markets, using tools such as ILS, the agency said in April 2018.

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